H arry Truman longed to find a one-handed economist who would give him straight news on the economy without the "on-the-one-hand, on-the-other-hand" commentary to follow. These days, one wonders what the former President might think about our two-handed economy.

On the one hand, growth slowed sharply in the second quarter to 1.4% from a torrid 5.5% in the first quarter. Exports fell off a cliff amid financial turbulence in Asia. Inventory building slowed as manufacturers braced for the worst. And factory output ground to a halt along with auto production at
General Motors
plants around the nation. On the other hand, data also show that the economy is motoring along. Employment growth, for instance, remained strong in July, explaining why consumers continue to open their wallets and spend away.

Baffled by the divergent trends in today's economy, some may wish they had more than two hands when explaining their views. For the time being, though, bond investors are focusing on the good news. The healthy gain in Treasury market prices Friday in the face of evidence that employment growth remains robust bears this out. Instead of fretting about the longer-term inflation implications of tight labor markets, bond investors rejoiced at the general lack of wage pressures at present, sending the yield on the 30-year Treasury bond down to 5.625% from 5.715% a week earlier.

But such optimism may be short-lived. Indeed, the finest minds on Wall Street are trying to make sense of a bizarre smorgasbord of developments that have little precedent in post-World War II history: Financial contagion in Asia. A vulnerable U.S. stock market. Recession in Japan. Deflationary forces from overseas fighting domestic trends that augur for accelerating prices. A strong dollar that's restraining U.S. competitiveness. A weak yen that's causing imbalances in global currency markets. And a Federal Reserve with little to do but sit back and say a prayer or two.

"Right now the crosscurrents are at extremes," notes Jeffrey Schoenfeld, partner at Brown Brothers Harriman.

If all of this sounds overly dramatic, it's only because we're living in interesting times, as even "give 'em hell Harry" might agree. Equally perplexing is why the U.S. bond market, after serving as the safe haven of choice over the last year, is not benefiting as much from financial instability as one might have expected, particularly where the U.S. stock market is concerned.

The reason is that suddenly there are fewer forces pushing U.S. yields lower than there are arguing for steady-to-higher rates. Admittedly, this sounds counterintuitive, given how wobbly the stock market has become in recent weeks and given the dollar's persistent brawn (it ended the week at 146.27 yen). Throw in the fact that average hourly earnings posted only a modest increase in July, while nonfarm payrolls rose just 66,000.

But here's a list of explanations for why Treasury yields may have bottomed out for a while. First and foremost is Fed policy. Treasury yields, with the exception of the 30-year bond, are now trading well below the 5 1/2 % federal-funds rate target, which typically sets a floor for rates. Since yields already are artificially low because of money fleeing Asia, it will be difficult for rates to move much lower until there's a chance the Fed will ease monetary policy.

Next, weaker stocks could mean a weaker dollar, as capital flees from the U.S. Because foreigners have been the biggest net buyers of Treasuries over the last few years -- $200 billion per year on average in the last three -- a weakening currency will hurt bonds. Another factor is that money managers are already positioned long in the bond market, with durations at seven-year highs. And if the economy slows markedly, bringing the stock market down with it, government tax revenues will plunge, possibly leading to a return of budget deficits and more Treasury supply. Finally, Wall Street is facing piles of new debt, including the biggest corporate deal ever (
WorldCom
sold $6.1. billion of bonds -- see Trading Points, facing page) and next week's quarterly refunding operation totaling $37 billion of new government debt.

Perhaps it was the writing on the wall that encouraged Warren Buffett to sell all of his zero-coupon Treasury bond holdings. Buffett raised eyebrows at the start of the year when
Berkshire Hathaway
's annual report confirmed that the Sage of Omaha had amassed a healthy chunk of zero-coupon bonds, $4.6 billion worth, to be exact. It was a blaring buy-sign for some bond market folks and another blow to the bond vigilantes we hear so little from these days. But the firm's second-quarter earnings report disclosed that the position had been liquidated. Market chatter had Buffett swapping the zeros for intermediate notes, which implies that he sees the bond market offering only opportunity for coupon-clipping instead of capital gains.

T he labor market didn't exactly weaken in July. Payrolls would have risen a robust 207,000, if not for the now-resolved General Motors strike, following a 196,000 gain in June. In fact, the nation's unemployment rate held steady at 4.5% in July, withstanding the sharp but temporary GM impact, which produced the worst factory job losses in 16 years.

The employment report underscores the current divergence between the manufacturing sector and the rest of the economy. The National Association of Purchasing Management survey held below 50% in July, indicating a slowing in factory activity, for the second consecutive month. And even removing the 141,000 jobs the GM strike took from the labor markets in July, manufacturing payrolls shrank 22,000, a decline consistent with the drops of 22,000 and 29,000 in May and June, respectively.

But in the rest of the economy, payrolls in industries outside manufacturing gained roughly 240,000, an impressive addition in line with the average monthly increase seen in the first six months of the year. Also, the nonfarm workweek was unchanged at 34.6 hours, while the index of aggregate hours worked rose 0.3% in July, putting it well above the second-quarter average and suggesting a good start to third-quarter gross domestic product.

"The bottom line is that this is a classic recipe for Fed policy to remain tilted toward higher interest rates," notes John Williams, chief economist at Bankers Trust.

A number of key reports on the economy due out this week will shed some light on the nation's cost structure, as well as how much momentum the economy carried into the third quarter. In particular, investors are anxious to see reports on July's producer prices and retail sales, and second-quarter productivity.

W hen official Washington isn't busy gossiping about Lewinskygate, it's talking about how to spend this year's budget surplus. One plan being bandied about would temporarily invest this year's projected $63 billion budget surplus in short-term, investment-grade commercial paper. At this point the idea, which amounts to a back-door privatization of Social Security (see Privatizing Social Secuirty ), is considered a nonstarter in the nation's capital. It would require considerable and heated debate on Capitol Hill and in the White House. As such, lawmakers would probably strike a deal to cut taxes long before a consensus could be reached over whether the government should invest in the debt of
Coca-Cola
or
PepsiCo
, or tobacco companies. However, if such a program were established, spreads in select areas of the commercial paper market would almost certainly tighten. Asks William Dawson of Federal Investors: "Rather than the federal government becoming one of Wall Street's biggest shareholders, why doesn't Congress use the money to pay down debt?" A question well put.

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